Voter initiative seeks to put price on carbon

Yet a citizens initiative aims to change that by taxing carbon.

“If you believe we have a moral obligation to tackle climate change, than we have to do more than what we’re doing right now,” said Yoram Bauman, economist and CEO of Carbon WA, the group backing the initiative.

Started as a grassroots movement, Carbon WA has garnered 360,000 signatures for Initiative 732. It is likely to be on the ballot in the fall.

It would trigger major tax reform meant to drastically cut carbon dioxide emissions, which are a key cause of climate change. It would impose a tax on carbon emissions, hitting everything from large manufacturers to utilities. The costs would passed to consumers through increased prices for gasoline, natural gas, electricity and other commodities. At the same time, it would do away with other taxes in an effort to remain revenue neutral for the state.

Proponents say the measure could cut carbon emissions without expanding the government. Opponents say the measure wouldn’t significantly affect global carbon emissions and could make Washington industries less competitive. It’s controversial, but it has also united some strange political bedfellows, and the debate is divided along unusual lines.

Based on a model from British Columbia, the initiative would introduce a $15 per ton tax on carbon emissions from fossil fuels in the first year and then jump to $25 per a ton in the second year. Thereafter, the tax would rise annually by 3.5 percent, plus inflation, and eventually top out at $100 a ton. It also would immediately cut the Business & Occupation tax for manufacturers to essentially zero. The sales tax would fall by one percentage point for everyone in the first two years of the initiative. Eligible low-income families would also get a tax rebate up of to $1,500 annually.

Filling up the fuel tank would cost about 25 cents more per a gallon of gas or diesel, according to Carbon WA. Higher costs for fossil fuels could also lead electric utilities to increase their rates, although it’s not clear by how much.

Effects on electricity costs

The Cowlitz PUD and other utilities are particularly worried about the initiative, though it may have a silver lining of sorts for the PUD.

Just 7 percent of Cowlitz PUD’s electricity came from carbon-emitting fossil fuels in 2013, and in 2014 it used just 3 percent. (Figures for 2015 haven’t been released yet.)

“We’re fortunate that our portfolio is really clean,” said Steve Kern, the PUD’s general manager.

The utility gets about 80 percent of its power from hydroelectric dams, and most of the rest comes from wind farms and nuclear plants, none of which emit carbon dioxide. But it still draws a slice of its energy from fossil fuels, such as natural gas or coal, and use of those goes up when bad water or wind years reduce production of hydro and wind power.

PUD officials estimate that the carbon tax could cost the utility about $5 million to $9 million in the first year, or as much as 3 percent of the PUD’s $282 million 2016 budget. The tax would also rise incrementally, and the PUD projects that by 2047 costs could range from $26 million to $50 million (in 2016 dollars).

“It complicates our ability to do business, and it will drive our business costs up,” Kern said, saying there’s no room in the utility’s “lean” budget to absorb the costs.

As a rule of thumb, utilities typically increase rates by 1 percentage point for every $1 million in cost increases. But Kern said other factors could affect whether I-732 forces the PUD to raise rates.

For example, I-732 could boost demand for the PUD’s wind energy and help reduce its $12 million in annual losses from its two Central Washington wind farms.

(In a development unrelated to I-732, the utility projects it could make $2 million to $4 million in one year from selling excess renewable energy if the state adopts a “cap and trade” carbon market, like California’s.)

“Depending on how these carbon initiatives and rules formulate and go forward, it could help us,” Kern said. “The surplus energy we sell could be valued higher in the wholesale market, because it’s really clean, green power.”

Effects on industry

I-732 would cut the B&O tax to manufacturers to essentially zero to ease the impact of the carbon tax. Carbon WA estimates that would save manufacturers in the state about $200 million annually. Other businesses would shave costs through a 1 percentage point reduction in the state sales tax that I-732 would trigger. Proponents say the initiative is therefore “revenue neutral.”

But for energy-intensive businesses, those breaks wouldn’t offset the cost of the carbon tax and would put Washington producers at an competitive disadvantage, opponents say. Refineries, smelters and food processors, for example, would pay a big price. So would forestry products manufacturers, including pulp and paper mills like the ones owned by Weyerhaeuser Co. and KapStone Paper and Packaging Co. in Longview.

On average, pulp and paper mills in Washington get 83 percent of their power by burning wood waste and other biomass products, according to Northwest Pulp and Paper Association. Biomass would not be subject to the carbon tax.

To supplement the biomass, though, many pulp mills use electricity purchased from local utilities. Several also burn coal or natural gas on site, and they would be hit with a “double whammy” in carbon taxes, said Chris McCabe, executive director of Northwest Pulp and Paper Association. He estimates that some of the state’s larger paper mills could be hit with $5 million in increased costs. He suggested some makers could move production to states with less stringent rules.

“It’s almost certain that those other facilities making the same products aren’t going to be using carbon-neutral biomass that we are,” McCabe said. “The same product made somewhere else could actually increase our global greenhouse gas emissions.”

Bauman said the business community tends to “scream bloody murder” over carbon regulation, but its concerns are overblown.

“There’s just tremendous opportunity for pulp and paper to move in the direction of (increased) biomass. I think they should really see (the initiative) as an opportunity,” he said.

British Columbia’s carbon tax hasn’t damaged the economy as critics though it would, he said.

“The general attitude in the business community toward the carbon tax up there in B.C., is a grudging acceptance,” he said. “The economy is doing okay. It’s not going to be the end of the world.”

British Columbia

In 2008, British Columbia imposed a tax of $7.40 a ton. The tax rose every year and was capped in 2012 it at $22.20 a ton (figures are in US dollars). To keep the measure revenue neutral, the provincial government also reduced corporate and income taxes. British Columbia now has the lowest personal income tax rate in Canada and one of the lowest corporate rates in North America, The Economist reported.

“It’s kind of a textbook case of how you can do a so-called environmental tax shift. Reforming the tax system with a view to reaching an environmental objective without growing government,” said Jock Finlayson, executive vice president and chief policy officer at Business Council of British Columbia.

Like Washington, British Columbia gets most of its electricity from carbon-free hydropower. So perhaps the biggest impact of its carbon tax was declining fuel consumption, which fell 16 percent in the first six years of the tax. It leveled off after the tax was capped in 2012. (It’s hard, though, to filter out the tax’s impact from other factors that affect fuel usage and emissions, such as the recession and the natural gas boom, according to an analysis from Seattle-based Sightline Institute.)

Overall, greenhouse gas emissions in the province fell by about 6 percent between 2008 and 2011, but they started to creep up again in 2012. They still were 3.4 percent lower in 2013 than in 2008, according to data from the provincial government.

Opponents say the increasing emissions may show the tax doesn’t work. Proponents attribute the stall in progress to the fact that the tax itself isn’t increasing annually any more.

The carbon tax hasn’t appeared to hurt the province’s overall economy.

Between 2008 and 2013, British Columbia’s economy only slightly outpaced the rest of the country, with a real GDP growth rate of 0.5 percent compared to 0.3 percent nationally.

“We think it’s been a wash. It has neither helped nor hurt the overall performance of the B.C. economy,” Finlayson said.

However, some energy-intensive sectors have taken blows. British Columbia cement makers say they’ve lost about a third of their market share to Asian and U.S. imports, The Economist reported.

Other energy-intensive industries also have seen costs rise.

“Their cost for producing a ton of pulp or paper or a board foot of timber has increased,” Finlayson said. “But the total effect has been relatively small because there are a lot other important things driving their business.”

Businesses with lower energy use won’t see the same costs.

“Either you come out ahead or behind, depending on the nature of your industry,” Finalyson said. “If you’re Microsoft, I think you’re likely to be coming out on the positive side of ledger. If your energy is relatively intensive in fossil fuels, you’re going to come out behind.”

Unusual bedfellows

Political battle lines drawn around I-732 are unusual. The Washington State Democratic Party opposes the measure, but several Democratic legislators have endorsed it.

Sen. Dean Takko, D-Longview, and Rep. J.D. Rossetti, D-Longview, both argue that the initiative would hurt industries in Cowlitz County without having a huge effect on global climate emissions.

“Our people are starving for jobs in our district, and anything that sets us back farther is going to be a major concern for me,” Rossetti said.

Rep. Ed Orcutt, R-Kalama, said measures like I-732 are too punitive.

“You can use a carrot or you can stick” to force people to cut emissions, Orcutt said. “I think incentives are a better way.”

The measure is backed by some conservatives, such as Bill Finkbeiner, the former Republican Senate majority leader, even though the state party’s platform asserts that “warming from human generated greenhouse gases has yet to be proven.”

Carbon WA analysts estimate that I-732 would generate about $1.7 billion in revenue for the state annually, but it also would provide about $1.7 billion in taxpayer savings and benefits.

Opponents, though, doubt the measure is revenue neutral, pointing out that state Office of Financial Management estimates the measure’s net effect would reduce state revenues by $914 million over four years.

Bauman, of Carbon WA, said the state analysis did not include revenue from taxing exported energy or spot-market energy sales, missing about $600 million worth of revenue. OFM also placed two years’ worth of rebates for the poor into one year, he said, which overestimated the costs by about $260 million.

Opponents aren’t buying Bauman’s rebuttal.

“Yoram (Bauman) is one economist. ... OFM has scores of economists that have degrees as good as his, or better,” said Jeff Johnson, president of Washington State Labor Council.

Interestingly, environmental groups are divided on the Initiative. But OneAmerica, an immigrant and civil rights group, says it could hurt low-income and people of color people by burdening them with increased energy costs and undercutting the state budgets for assistance programs. OneAmerica has joined with other groups in opposing the measure. They include the Labor Council, which argues that the initiative could force employers to move out-of-state, leading to job losses.

“There’s nothing in I-732 that would compensate workers or communities who could end up losing jobs and tax revenue from, say, a mill in Cowlitz County moving,” Johnson said.

“You can’t do a big carbon policy without having some sort just transitional fund that help workers and their communities,” he said.